what additional red tape beyond/instead of forms 1099 and 1096 must a small
business in the U.S. go through to hire a contractor (for web design
services) who resides in canada(toronto)?  i've been perusing some of
the IRS forms which lead me to believe that all i need to do before
hiring/paying him is have him fill out a w-8 (perhaps a w-8eci) but
field 6 requires a u.s. taxpayer identification number and this
canadian contractor doesn't have such a number.  if this is what i
need him to do, is it easy to get one?

Hi yakker,

The key to this question is whether the service performed is done in
the US or elsewhere. Payments made to nonresident aliens for services
performed outside the U.S. are not taxable or reportable (Sec.1441(a)
of the Internal Revenue Code), therefore, they don't need to obtain a
TIN (and thus are not subject to any backup withholding as well).

US TAX FOR ALIENS: Publication 519: US Tax Guide for Aliens:
Chapter 2, page 11:
"A nonresident alien usually is subject to U.S. income tax only on
U.S. source income."
Table 2?1, page 11: 
Summary of Source Rules for Income of Nonresident:
 A. Factor Determining Source:
  1. Salaries, wages, other compensation: Where services performed
  2. Business income: Personal services:  Where services performed
Chapter 2, page 12: 
"All wages and any other compensation for services performed in the
United States are considered to be from sources in the United States."
"If your compensation is for personal services performed both inside
and outside the United States, you must figure the amount of income
that is for services performed in the United States."
http://www.irs.gov/pub/irs-pdf/p519.pdf

Pay for Personal Services Performed: Withholding Tax:
"You generally must withhold tax at the 30% rate on compensation you
pay to a nonresident alien individual for labor or *personal services
performed in the United States*..."
http://www.irs.gov/pub/irs-pdf/p515.pdf

Even though your Canadian contractor is not subject to US tax, you
will be filing information concerning your business expenses. The
forms to use are 1042 & 1042-S (not 1099 & 1096 & W-8) and you will
use Code 03 to explain his withholding exemption.

Form 1042-S: Foreign Person?s U.S. Source Income Subject to Withholding:
Box 6, Exemption Code 03: Income is not from U.S. sources:
* "Non-U.S. source income received by a nonresident alien is not
subject to U.S. tax. Use Exemption Code 03 when entering an amount for
information reporting purposes only."
http://www.irs.gov/pub/irs-pdf/f1042s03.pdf

Form 1042: Annual Withholding Tax Return for Source Income of Foreign Persons:
http://www.irs.gov/pub/irs-pdf/f1042.pdf

"U.S. Source Income" meaning "services *performed in the United
States* are considered to be from sources in the United States" as
stated above.

Additional Links:

International Taxpayer - Effectively Connected Income (ECI)
http://www.irs.gov/businesses/small/international/article/0,,id=96409,00.html

Pay for Personal Services Performed:
http://www.irs.gov/businesses/small/international/article/0,,id=105085,00.html

I hope I've been able to make this clear and have helped you to sort
out this rather complicated question. It all falls into place once you
realize that Uncle Sam can't tax an alien for work performed outside
the US. If you have any questions, please post a clarification request
before rating my answer and I will be happy to respond.

Please note the "Important Disclaimer" at the bottom of this page - I
am not an authority of IRS tax laws and I would like to encourage you
to contact the IRS for confirmation.

IRS: Help by email:
http://www.irs.gov/help/page/0,,id=13162,00.html

IRS: Local Offices:
http://www.irs.gov/localcontacts/index.html

Thank you,
hummer

Google Search Terms Used:

IRS Form 1042-S, "nonresident alien individuals"
IRS "nonresident alien individuals"
IRS W-8 "nonresident alien individuals"
IRS Form 1099 
IRS Form 1096

I also searched extensively within the IRS website.

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Request for Answer Clarification by yakker-ga on 24 Nov 2003 17:25 PST

wow, so since he's performing the work in canada, it seems like for
now, i can just write him a check and not worry about it until i have
to file taxes with forms 1042 & 1042-S (or maybe just 1042-S)?

---

Clarification of Answer by hummer-ga on 24 Nov 2003 19:33 PST

Well, yakker, that's my take on it. The next step is to get in touch
with the IRS just to confirm. You'll need to send a copy of the 1042-S
next year to the Canadian because he will declare the income on his
Canadian Income Tax form.

In regards to Form 1042, it seems to go hand-in-hand with the 1042-S:
"You must file Form 1042 if:
You are required to file Form(s) 1042-S (whether or not any tax was
withheld or was required to be withheld). File Form 1042 even if you
file Forms 1042-S only on magnetic media or electronically."
http://www.irs.gov/pub/irs-pdf/f1042.pdf

I hope that's a happy "wow",  8-)
hummer

happy.

Terrific - thanks, yakker. Sincerely, hummer